Loan Program Plans to Offer Students Prepaid Bank Cards

The Department of Education plans to provide students with a prepaid card that would hold surplus loan money that is not needed for tuition, giving the government and financial services providers a firsthand look at how students are spending those dollars.

Students, meanwhile, may receive text messages about their spending choices after they swipe their cards, a reminder that the government is watching.

The Office of Federal Student Aid — the arm of the Education Department that oversees more than $1.3 trillion in student loans — said it expected to introduce the pilot program as early as late spring. As many as 100,000 students across four schools, which have not yet been chosen, could opt to accept the prepaid card, which acts more like a bank account.

When students receive loans that exceed their tuition, the extra money would be loaded onto the card, which could then be used to pay for books, food and other expenses like rent.

The department views the offering as a cost-efficient way to provide students with access to a banklike product that rivals anything on the commercial market. But some consumer advocates said they viewed the effort as overly paternalistic.

The intent of the text messages would be to give real-time financial counseling, according to a solicitation document issued by the Education Department. The service would provide “the student loan customer with specific understanding of long-term dollars and cents ramification of making purchases using their student loan funds,” the document states.

The program is part of the department’s broader plan to modernize the system it uses to make loans to and collect payments from more than 17 million students annually. The card, for instance, would be a feature within the myStudentAid mobile app, which would allow students and their parents to complete federal aid applications from a phone and gain access to information about their loans, among other things, according to the document, which was prepared to solicit bids from banks and financial services providers.

The card industry has a long history of exploiting students on campus, charging fees at every turn. Higher One, in a particularly egregious example, aggressively marketed debit accounts littered with fees to college students — and was ordered to pay millions of dollars in restitution for deceptive marketing and improper disclosures.

Those kinds of practices led the Obama administration to issue, in 2015, stronger regulations that limited the fees companies could charge, among other protections.

The solicitation lists several fees that cannot be charged to students, including those for annual membership, activation and account maintenance. It would allow up to three free withdrawals from out-of-network automated teller machines before fees kicked in.

Consumer advocates and some Democratic senators, however, have voiced concerns beyond fees, including how students’ spending patterns and other data would be used — and whether their spending could be restricted to certain categories. The solicitation document says the card will come with the ability to restrict its use to certain types of products and merchants, but the department said spending, while monitored, would not be restricted.

“While we support efforts to improve the financial aid distribution process, we have serious concerns about your proposal given the poor track record of such cards in the past,” Senator Richard J. Durbin, a Democrat from Illinois, and four other senators wrote in a letter to Wayne Johnson, chief operating officer of the Federal Student Aid Office. They asked him to answer 19 questions by Jan. 30.

“In the absence of strict oversight and safeguards,” they wrote, “these card programs can leave students and taxpayers vulnerable to exploitation.”

And while the solicitation from the Office of Federal Student Aid, known as F.S.A., lays out several restrictions for the financial services providers that will ultimately run the program, it also explicitly states how they stand to benefit: The payment card, the document reads, “will be the first step in exploring a new, meaningful way to build a stronger, lifetime relationship with F.S.A.’s customers.”

That language set off alarms for consumer advocates, who said the department was offering banks and card issuers an opportunity to lure in customers while they were young, while pushing the boundaries of what a federal student aid office should be.

“That is incredibly problematic,” said Colleen Campbell, the associate director for postsecondary education at the Center for American Progress, a liberal research group. “Students will be sharing all of their data with a company that is open to marketing other products to them.”

The financial services providers in the program will need to receive permission from students to cross-market any other products. But how exactly will that work?

Dr. Johnson — a former chief executive officer of First Performance, a card payments company — said students wouldn’t be asked to provide a one-time blanket permission to be sent solicitations, but instead would be asked case by case. So they might be asked if they were interested in a list of products of services and wouldn’t receive more information unless they agreed.

The mantra is “customer first, student first, protection first,” Dr. Johnson said in an interview. “And, oh, by the way, super cool stuff,” he added, referring to the card’s benefits.

The card is expected to incorporate several features. A student’s parents would be able to load more money into another bucket on the card, and students would be able to make peer-to-peer payments. The program’s developers also hope to incorporate budget options, enabling students to manage their spending.

A student, for instance, might set a $200 monthly budget for groceries; when the student reached $190, he or she would be alerted with a text message saying the self-imposed limit was near.

The department said students at schools in the program would still be able to receive their money through existing methods — paper checks and direct deposit into their bank account or onto another prepaid card — if their schools offered those options.

Several federal agencies already disburse benefits through prepaid cards, including the Department of Veterans Affairs and the Social Security Administration.

Debbie Schwartz, a former marketing executive for a financial services firm and founder of a service called Road2College, said that even if the government kept fees and abuses in check, access to students’ spending patterns and other data would be a boon to financial services providers.

That information, according the Education Department, will be owned by the providers, though how they use it will be restricted by the department.

“The fact that they are giving the financial services companies the opportunity to get something into a student’s hand backed by the federal government,” Ms. Schwartz said, “is a privilege.”